The most highly levered market ever to exist?

Although the cryptocapital markets have lost over 80% of the value from the all time high in January of 2018 (something to be expected), the market is still proliferated with an un-quantifiable yet extreme rate of leverage. So much so, that it may be the most highly leveraged market to exist.

Within the “crypto-ecosystem”, any conversation around debt is dirty, unpopular, and almost altogether written off. After all, the decentralized economy embodied a vision of allowing the masses to distance themselves from the grappling power of the major financial institutions and governments. What we learned in 2008 more than anything, is irrational issuance and accumulation of debt is bad. However, the open sourced experiment we are now seeing play out may have created a new form of leverage more dangerous than any that previously or currently exists, one that is almost erasable.

Specifically, leverage has started to accumulate through two should be quantifiable modalities and a third subjective measurement:

1. Lost Coins (unquantifiable but should be known…)
2. Forks and Airdrops (unquantifiable but should be known…)
3. Repetition (subjective and almost impossible to stop…)

Lost Coins — Accounting for an estimated yet completely unknown 5-40% of all coins to exist, are a vital flaw within the idyllic cryptopian beliefs.

How coins are lost is something that happens across all major* cryptocurrencies. Death, miss-typed wallet addresses, lost passwords, broken hardware such as computers($127 Million Bitcoin in a Dump?), and a variety of other instances that Satoshi did not plan for are all examples. While most say the impact of lost coins is calculated into the price, this demonstrates the juvenile understanding most have around the way financial markets and asset pricing functions.

*EOS has a built in functionality to repopulate all unused or lost coins every three years. This is a highly controversial practice but keeps unintentional leverage out of their system.

Forks — A valiant attempt to improve functionality, can have a direct but unintended consequence of leveraging up the system to an even further degree, by double contributing to lost coins.

What happens in a fork is, the underlying source code (generally what bitcoin runs on) is taken and copied, improved (changed), then sent back out to the community as an update. This is what happened in Bitcoin Cash. The issue, is too often because the creators are not in the community building business, they distribute it back out to the same community they took the code from(or part there of). However, few people in the community ever become aware of what has happened. While a simple solution could be to ask everyone to claim their coins every 6–12 months, this is viewed as blasphemy.

In the case of bitcoin cash, the result of the fork is potentially 40% of the currency was lost before it was even issued.

In Airdrops, the same thing happens. Many sign up, forget about the tokens, do not ever want to use it/cannot, never intend to use it, or just realize the coins don’t serve any utility at all.

Repetition — While it is great to see bitcoin improve, the hundreds of forked instances referenced above that result in lost coins also result in hundreds of projects trying to do the same thing.

Repetition should be a benefactor or a non issue however, the rise of Decentralized Exchanges which often allow for the posting of any crypto, have given home to these forks and therefore contribute to an obscure market cap pricing mechanism. Often a fork, while having no actual users, limited contributors, and no core team to further the project, obtain $10 million + valuations by doing nothing but simply copying the code. Multiply this by 100 times and over $1 billion is being contributed to our market cap from no usage copies. This while nearly impossible to quantify makes no sense.

Fallout of Decentralization: The conundrum is that the way leverage has accumulated in this system is a direct bi-product of what also makes crypto so compelling, namely the decentralized open sourced community. By gifting to the community the ability to participate and contribute freely in a distributed fashion, the ecosystem has lacked central figures or the oft preached consensus. Disputes over code updates have seen multiple $100 million and in the case of BCH billion dollar versions pop up over night (referenced above).

By opening up the environment to all participants, there has been major technological advances or significant effort given to solve problems in a new way. However, this also has thrown the community into constant ever splitting divide. With each disagreement, more artificial leverage starts to accumulate. This will inevitably happen at a faster pace than projects disappear.

Fortunately, with all of this non-disappearing debt and continued divisiveness, when the system starts to fill back up, it will sky rocket.

Thank you ICO’s, now go away: Similarly to decentralization, we owe ICO’s a huge thank you, as well as a complete and utter shunning. ICO’s, while Digital Asset Advisors, has never partaken in one nor advised on one, we recognize them as the catalyst (albeit largely illegal) to getting the market interested in this new way of capital formation.

However, now that they have run their course, the public nature of DEX’s and poor architecture that results in lost coins/tokens has propped up our industry (and will continue to do so) with tremendous amounts of artificial, unidentifiable leverage, even at an +80% loss from our all time high.

A note about downturns: While an economic downturn is in almost every way horrible, the positive side is the re-establishment of “normal” debt levels. This is a bit of a confusing topic though, for example, as the US economy is comprised of about 60% debt and 40% leverage, when a downturn happens a lot of debt is whipped away. However at the trough leverage remains high, because equities lose more value than debt. Fortunately, when equities start to increase, debt stays consistent or grows more slowly, thereby establishing a new normal.

What is different in the crypto markets however, is the amount of leverage in a downturn because it is unaccounted for and subject to further losses both in interest and physical (digital coins), likely only increases.

So while economic downturns are awful in almost every way, crypto downturns are worse.